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Focus on: Loan rates fall to 6.0%

Borrowers received some New Year cheer this week after loan rates dropped to as low as 6.0%.

Brightening up an otherwise gloomy start to 2012, Tesco, Marks & Spencer and Sainsbury's Finance all lowered their rates, with other lenders expected to follow suit soon.

The new lower rates mean that if you’re looking to borrow between £7,500 and £14,999 now is an excellent time to do it, but who is offering the most competitive deals?

Let the loan wars commence

Tesco fired the first shot when it dropped its representative rate to 6.1%, down from 6.4%, at the time putting it in the top spot for loans between £7,500 and £14,999.

To show how this translates into lower payments, if you borrowed £7,500 over five years at the new rate of 6.1%, you’d pay a total of £1,220.70 in interest. That’s £63 less than the interest would have been on the old rate of 6.4%. Tesco’s loan is available for terms of 12 to 120 months.

Marks and Spencerreturned fire by cutting its representative rate from 6.4% to 6.0%, making it the cheapest provider overall of loans between £7,500 and £14,999. The M&S loan is available for terms of 12 to 60 months.

This means the same loan of £7,500 over five years would be a further £20.94 cheaper than Tesco and a significant £83.94 cheaper than it would have been at 6.4%.

M&S also allows its loan customers to defer payments for the first three months, subject to lending criteria.

Sainsbury's also repriced its standard loan offer, coming out with 6.0% APR on loans between £7,500 and £15,00 over 1-3 years and 6.1% on the same amount over 4 to 5 years.

Are there any catches?

Tesco charges up to two months’ interest if you choose to settle your loan early and doesn’t allow customers to defer repayments for as long as M&S does.

However, you are allowed to defer payment by two months at the beginning of the loan, subject to availability. As with M&S, however, interest continues to accrue during this period.

To apply for an M&S loan you must be a UK resident aged 30 or over, or a homeowner.

Sainbury's new, lower APR rates are only available to Nectar Card holders.

Are you eligible?

Depending on your credit rating and income, you may not be eligible for the best loan rates on the market. Some people might not qualify for the best rates if they have a less than impeccable credit history and others may be rejected outright.

Getting rejected for a loan application can have a negative effect on your credit rating, which in turn can hamper your chances of getting credit in the future.

If you want to limit the chances of your application being rejected, you can use MoneySupermarket’s loans smart search to get an estimate of how likely you are to be accepted for a loan.

You can also limit the chances of being rejected by checking your credit profile for any errors. You can get hold of a copy of your credit file online from credit agencies like Equifax or Experian for a small fee.

If you find any discrepancies you can contact your creditors and get them to correct the error to give your credit file a boost.

Borrow more, pay less?

It sounds odd, but you can sometimes save money by borrowing more. This is because rates on smaller loans tend to be higher.

If the amount you’re looking to borrow skirts the border between the lower tier of loans and the next tier, you may want to ask the lender what the total repayments would be if you borrowed an extra £500.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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